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T H E O N LY ALL- D I GI TAL ALL-BUSINESS RESOURCE FOR CREDIT UN I O NS THE CUSO ISSUE MARCH 2016 VOLUME 11 ISSUE 3 Compliance BY JASON SKEMP Focus on These This Year 5 People Often the Forgotten Aspect of Business Continuity BY JAMES GREEN NEW Team Builder Introducing The Team Builder from CU Business Magazine Helping to strengthen credit unions and their communities. VIEW FROM THE CROW S NEST COMPLIANCE UPDATE LENDING SOLUTIONS MARKETING MATTERS TECHNICALLY SPEAKING BRANCH BUSINESS CFO CURRENCY CEO VELOCITY MEMBER BUSINESS LENDING BUILD YOUR TEAM Tim O Hara Publisher CU Business Dear Tim You know how much I enjoy reading your magazine which is always filled with helpful and timely articles Sign up at www.creditunionbusiness.com. Join hundreds of CUs across the country by sharpening the skill sets of your department heads by signing up to 10 team members to receive CU Business monthly eMagazine weekly eNewsletters and over 5 years of back issues on our website. We email each Team Member PDF versions of pertinent articles before they are published according to title CEO gets CEO Velocity and View from the Crow s Nest CFO receives CFO Currency Lending department gets Lending Solutions Marketing Executives receive Marketing Matters Compliance department gets Compliance Update Trainers receive CU Training Branch Supervisors get Branch BUSINESS. Cost is only 500 per year 20% of which is sent to Children s Miracle Network to be filtered to the CMN children s hospital nearest the CU s community. A Website Wall of Fame will credit each CU with the CMN donation citing CU name city asset base and CEO. With the new Team Builder program I ll be able to retain hard copies of your magazine and ensure that my colleagues receive helpful articles on a positionspecific basis I also think supporting the Children s Miracle Network is a wonderful idea Thanks again and keep up the great work Best Walter Walter Merkle Executive Vice President Northwest Georgia Credit Union Signing up is simple Send a check for 500 ( 100 of which goes to CMN) along with a list of names titles and email addresses of up to 10 team members. Or pay just 46.60 per month on any major credit card www. creditunionbusiness.com register. PO Box 2223 Palm Beach Fl. 33480 Or call 561-282-6015 1 TABLE OF CONTENTS MARCH 2016 VOLUME 11 ISSUE 3 THE ONLY ALL-DIGITAL ALL-BUSINESS RESOURCE FOR CREDIT UNIONS 4 6 9 13 16 18 UP FRONT Ready...Set...Go Build Your Team Tim O Hara CFO CURRENCY Emily Hollis CEO VELOCITY 21 24 28 33 36 40 BUSINESS CONTINUITY Back-Testing Alm Reports The Strategic and Profitable Nature of Member Portfolio Management Scott McClymonds COMPLIANCE UPDATE Jason Skemp CUSO S People Often the Forgotten Aspect of Business Continuity James Green CU TRAINING Why Is Our Strategy .... Kenneth C. Bator MEMBER BUSINESS LENDING Compliance Focus on These Five This Year CUSO s An Option for Improving Credit Union Efficiency Dr. Randy Thompson CU COOPERATIVES Winds of Change Are Blowing in Portfolio Risk Management Ryal Tayloe BRANCH BUSINESS Branch of the Future The Traditional Office Will Be in the Mix Meredith Deen REGULATORY TIPS MEMBERS Development Company Collaboration in Action Jeff Kline Resources Are Available to Help Carry the Burden of Regulatory Compliance Dennis Child LENDING SOLUTIONS Do You Know Your Community s FICO Score Lorrie Wohfeil 1 C R E D I T U N I O N B U S I N E S S M A R C H 2 0 1 6 C U B U S I N E S S . C O M ABOUT US THE ONLY ALL-DIGITAL ALL-BUSINESS RESOURCE FOR CREDIT UNIONS PUBLISHING TEAM Tim O Hara Editor & Publisher tim cubusiness.com Ashok Kumar Associate Publisher ashok cubusiness.com Patti Manzone Designer UP FRONT Tim O Hara CFO CURRENCY Emily Hollis CEO VELOCITY Scott McClymonds COMPLIANCE UPDATE Jason Skemp CUSO S Dr. Randy Thompson CU COOPERATIVES Jeff Kline BUSINESS CONTINUITY James Green CU TRAINING Kenneth C. Bator MEMBER BUSINESS LENDING Ryal Tayloe BRANCH BUSINESS Meredith Deen REGULATORY TIPS Dennis Child LENDING SOLUTIONS Lorrie Wohfeil 2 C R E D I T U N I O N B U S I N E S S M A R C H 2 0 1 6 C U B U S I N E S S . C O M T H E O N LY A LL- D IG ITA L A LL- BU SIN E SS R E SO U R C E FO R C R E D IT U N IO N S THE CUSO ISSUE MARCH 2016 VOLUME 11 ISSUE 3 Compliance BY JASON SKEMP Focus on These This Year 5 People Often the Forgotten Aspect of Business Continuity BY JAMES GREEN NEW Team Builder SUBSCRIPTIONS Credit Union BUSINESS is published monthly (12 issues per year) by CU Business Magazine Inc. A one-year Digital membership is 75 yr. An online membership form is available at https creditunionbusiness.com subscription SALES AND ADVERTISING Tim O Hara Publisher tim cubusiness.com or 561-282-6015 1 CONTACT INFORMATION Credit Union BUSINESS Magazine P.O. Box 2223 Palm Beach FL 33480 (561) 282-6015 (561) 588-7711 (fax) tim cubusiness.com Stuck in the past Sure your current CPI program works but is it the best option for your borrowers and your staff Hybrid CPI transforms the way you track your loan portfolio--reducing risk the administrative burden on your staff and regulatory concerns. Hybrid CPI is a product that doesn t inflate delinquencies so we don t have to worry about that when underwriting someone s ability to repay a loan. The program allows us to lend more because the tracking program will pick them up without kicking the person into the collections queue. --Arick Williams Vice President of Lending Columbine Federal Credit Union Click here to download our free case study and find out what our clients have to say about Hybrid CPI. 2015 SWBC. All rights reserved. 5540-1442 UP TAB FRONT BY TIM O HARA D Ready... Set.... Go Build Your Team oes it sometimes seem like things just come together exactly when you want them to It does for me Take our new Team Builder paid subscription program for instance. We have been producing great CU business information every month for over 10 years and we ve been collecting it on our website in the form of past digital flip book issues each month for the last five years. All 60 issues are readily available to our paid subscribers. Collectively they represent a handy reference library with hundreds of good ideas and proven best practices. You can learn what Suze Orman Steve Forbes and CNBC financial whiz Larry Kudlow thought of credit unions way back in 2008 and 2009 as we were all in the midst of the biggest depression of many of our lifetimes. (Hint Each had a very positive impression of credit unions and all predicted we would be fine.) From launch day July 1 2005 CUB has been edited expressly for C-Level credit union professionals with the express purpose of helping you run your credit union as successfully as possible. To that end we organized the editorial content to resemble the department heads I imagined sat around a large rectangular conference table to plot their credit union s future. I imagined the CEO at the end of that table flanked by the Chief Financial Officer and the Chief Marketing Office and surrounded by the Chief Lending Officer the Chief Technology Officer the Chief Compliance Officer the Branch Supervisor and the Business Development Officer. Then we began collecting information that would interest each department head. And after a while we attracted some pretty heavy-hitter business experts to join us. They began producing some on-target columns like Emily Hollis s CFO Currency and Rex Johnson s Lending Solutions. From there we tracked down other pros who have been there and done that and are more than willing to share the benefits of their knowledge with our readers who are also some of their best customers. This issue is an excellent example of what I mean. We ve published it with 11 very good business articles broken down by department function. We are working for the entire CU Team and each Team Member individually. Now we are offering the very best value in CU subscriptions again for your entire team but also for the community in which you work and live through our built-in charitable donation. These contributions are going to the favorite charity of majority of credit unions CMN s Credit Unions for Kids campaign Here is the deal In return for a nominal annual subscription price of 500 we will sign up every member of your Team to receive the CU BUSINESS monthly eMagazine and weekly eNewsletters. We will also open up our exhaustive website library to each Team Member which includes a helpful search function. In addition and perhaps most important to you we will target each department head to receive only those articles that apply to him or her like CFO Currency for finance professionals Lending Solutions for lenders etc. Members will receive emails with a printable PDF of each article. What s more 20 percent of each subscription received will be sent to the Children s Miracle Network to be applied to the CMN hospital nearest the credit union contributor. We will express our gratitude for each subscription donation by crediting the credit union and its CEO by name on our website on our new Wall of Fame. This month I will reach out to CEOs with the Team Builder offer with the hope that you will join us to strengthen both your CU Team with knowledge and your community with CMN. Thanks for reading Tim 4 C R E D I T U N I O N B U S I N E S S M A R C H 2 0 1 6 C U B U S I N E S S . C O M cuso A community joined together for a common purpose. In what ways does collaboration benefit a credit union Can it expand reach and outpace the competition Provide greater services and prevent newer risks At PSCU we know that credit unions are stronger when they stick together. And we re proud to be a 30-year leader in credit union connectedness. When you join PSCU you re joining the ranks of more than 800 credit unions nationwide that leverage the power of our cooperative. pscu.com 888.918.7357 CFO CURRENCY BY EMILY HOLLIS Back-Testing ALM Reports B What is back-testing and what benefits does implementation of such a model serve a credit union Read on to discover some of the ways in which comparing actual data with past projections can be and cannot be of value for your CU. . ack-testing a model compares the projections of a past report against the actual figures produced during that same time horizon. Back-testing is a way to check the sufficiency of the data the setup and the assumptions used to produce an analytical report. Comparing actual data with a past projection can help identify and measure discrepancies. That way any that are found can be properly explained or corrected. From an interest rate risk perspective back-testing is only possible in some cases. It s also important to note that the assumptions in an ALM model are necessary to isolate interest rate risk. Therefore they can t be perfectly replicated in actuality. The only way this replication could be achieved is if all projected rates in the modeled scenarios were to be realized. An ALM model typically stresses the balance sheet in parallel rate shocks. In reality yield curves would never move in such a way nor would they move immediately up 300 basis points the most focused scenario. Thus an institution couldn t use such shocked IRR results as a perfect basis for measuring future volatility. Back-testing base-case income projections is possible because the institution can compare the projected income of a previous base-case report relative to its actual earnings over that time period. But even this method is far from perfect because the model uses unrealistic rate prepayment and reinvestment assumptions specifically for IRR purposes (e.g. holding the balance sheet constant). Also note that the purpose of an ALM report is not to project base earnings but rather to shock interest rates to determine 6 C R E D I T U N I O N B U S I N E S S the effects on the institution s earnings. Therefore in most cases this analysis isn t of much value in risk management. But back-testing can be somewhat useful in measuring the accuracy of the model s inputs (e.g. for monitoring base-case income projections). The institution could compare the projected income from a recent report (such as the previous quarter) to its actual income earned. A more detailed analysis will highlight specific accounts or categories that varied notably from the projection. These accounts can then be checked in the model to ensure attributes are set correctly. An institution can also measure other historical projections versus actual results. Prepayment speeds are very important for any cash flow analysis and the institution could track internal prepayments per account type. Comparing that information against previous report assumptions may highlight outliers. Similarly member behavior as it relates to core deposits is a huge part of ALM analytics. Utilizing historical data is important to gauge the accuracy of current projections. Making use of previous analytics is another possible approach. First the institution should have a method for comparing the results of the current report with the previous report. Such comparison quickly isolates big movements over that period of time and these movements can then be reviewed to ensure appropriate M A R C H 2 0 1 6 C U B U S I N E S S . C O M 250 000 Credit Union Employees 92 Million Members 100 Million Miracles Since 1996 Credit Unions for Kids has raised more than 100 million for Children s Miracle Network Hospitals giving hope and healing to kids in your local community. YOUR FUNDRAISING DOLLARS IN ACTION MILLION 10 2 1 iMRI machine and surgical suite 1 Cardiac X-ray machine 1 Ultrasound machine 1 Bone marrow transplant 1 Fully-equipped Giraffe OmiBed incubator MILLION THOUSAND 270 THOUSAND 250 THOUSAND 100 CFO CURRENCY CFO CURRENCY CURRENCY CFO CFO CURRENCY are calculated figures not assumptions. The have significant implication on the ALM conclusion. The of time. Credit will need to be assumptions used should be changed government bond inputs allow the user to model cash flows with an end maturitybenchmark if budget surpluses dry up thein progressive intervals reviewed and authorized and setup rates that are similar to amortizations. the standard a model. and They have already become back-testing for pricing and decayand defensible assumptions. In addition it s market. the output should be recalculated to determine the impact this can take weeks. beneficial to make a comparison over several reports many corporate bonds. Reviewing the results Dividend and discount rates allow for the present value of a different assumption. you are on a macro scale because it modeled interest rate scenario. of If what-if willreports Knowing where swap rates and spreads are uncertain as to allow calculations (premiums) in each tracks the institution s key the When investors need many requirements metrics. allows management to of Effective duration calculations can then mathematically bebetter hedging and investment execution. Conclusion applying and the derivatives Sometimes alternative scenarios in previous to gauge credit risk and market sentiment the swap curve is understand using effects compared to that of the institution s assets. In this case effective Non-maturing deposits can be viewed as a franchise value consider reports can be used as a proxy for current results. If becoming the more important curve to analyze.engaging anplay these assumptions external duration is calculated by merely backing into the price change or benefits generated from loyalty of the membership when service provider to help rates move notably in a short time (say 100 bps over and how much variance you formula. For example the institution could value is 100 in a deposits are retained when dividend rates are low six months) then if the liability present go back half theEmily Hollis CFA is a partner with ALM the steps. in a higher can exist Financial through First between base 101 in view the shock-up 100 basis point 99 in the down market environment. And vice different financial derivatives the up 100 basis point scenario and projections versa A models. institution year and Properly used This Advisors LLC. 100 basis point scenario While the data will haveone percent that offers a non-maturity dividend rate higher to checkrisk the effective duration is changed from that time period. is theoffset way than market can best interest rate (i.e. (101-99) 200). movements will never be a perfect to attract hot money will decrease sufficiency of the the and the market rate the the economic within of its that is inherent value liabilities. It is imperative to model these accounts for aof parallel shock measuring price and income volatilities data and the validity more competencies to meet the final requirements. The second part credit union industry today. This is vital because as competition accurate depiction of allow rate unions to compete Sensitivity Analysis against thewhen all requirements are the assumptions used to produce an analytical report.more can be a good check model. grows derivatives can interestcreditrisk. and final application is submitted At ALM First we believe that by recognizing the The regulator strongly suggests sensitivity analyses as a means effectively. completed including dealer contracts. partner with ALM First Emily Mor Hollis CFA to shortfalls thea effects of changing assumptions. Sensitivity Emily Hollis CFA is isaa partner with ALM First Financial quantify of model the institution would be better off Setting up a on at a dealer isalternative what-if focusing effortslinebecause the core share to becoming a Advisors LLC. performing similar evaluation may Advisors LLC. analyses are essential member of the FHLB--it can be laborious and takes a good deal Emily Hollis CFA is a partner with ALM First Financial scenarios that stress-test varying assumptions versus Advisors LLC. Exhibit 4 The outputs Some analysts view swaps as the most likely replacement for Treasury bonds as a financial benchmark if budget surpluses dry up the government bond market. 8 www.cubusiness.com C R E D I T U N I O N B U S I N E S S November 2014 M A R C H 2 0 1 6 Credit Union BUSINESS C U B U S I N E S S . C O M 15 CEO VELOCITY BY SCOTT MCCLYMONDS The Strategic and Profitable Nature of Member Portfolio Management I What is member portfolio management If the term conjures up images of old-school analytics then you re getting it all wrong. The scope of member portfolio management goes wider and deeper into a credit union ultimately resulting in an uptick in profitability. Learn how to leverage it to your CU s advantage. n the last two issues of this column I have covered the approaches of Doug Fecher and Steve Hennigan in serving moderate income Americans and the cultural changes their credit unions are undergoing to accommodate their new direction. I d like to take a different focus in this issue and speak with you about something I call member portfolio management. If you have attended any credit union conferences in the last few years you know the cousin of member portfolio management also referred to as big data or analytics. In fairness to CEOs executive teams and boards the people who sell and make presentations on big data and analytics have made these topics as hard to understand as trying to take apart the transmission of my F150 and put it back together. In other words it s either way too esoteric to make any practical sense or it s so detailed that executives eyes glaze over. Actually I don t even use the terms big data or analytics anymore. I cringe when I m asked to speak on big data. Those are words used either to sell software or do tactical campaign management and that s not what we re about here. you can build appropriate strategies for each member group. Just think about your loan portfolio for a minute. It has different risks maturities and ALM concerns. Similarly your members have different attrition risks profitability levels revenue mixes demographics levels of financial health preferences and life events. Member portfolio management is the opposite of the mass-market approach taken by most of your competitors. It is a commitment to deeply understand the very people you exist to serve. It takes your team s knowledge of your members to a whole new level and changes how you operate. Here are a couple of examples from credit union CEOs I have written about in this column Doug Fecher at WPCU in Dayton Ohio is breaking his membership into financial health groups called Thriving Coping and Vulnerable. He and his team are learning as much as possible about each group and are restructuring their entire company to meet the needs of each group. What Is Member Portfolio Management So what is member portfolio management Member portfolio management breaks the entire membership of your credit union into critical digestible parts so 9 C R E D I T U N I O N B U S I N E S S M A R C H 2 0 1 6 C U B U S I N E S S . C O M TAB VELOCITY CEO Joe Newberry at Redstone FCU in Huntsville Ala. has done something similar by focusing on the life events of his members experience. Redstone has created new product approaches as well as changes in the way it interacts with members. The credit union continues to learn test and innovate Member Portfolio Management Is Not Your Father s Analytics How are these approaches to member portfolio management different from typical analytics efforts In every way Typical analytics efforts generally focus on crossselling more products and meeting budget numbers. You need more mortgages and want to convert indirect borrowers into checking account holders so you find members who are most likely to acquire those services and create marketing campaigns to cater to them. Usually the marketing department digital banking and front-line business units are involved but generally executive management is far removed from this process because of its tactical nature. In contrast the approaches taken by Doug Joe and other CEOs who have embraced member portfolio management are strategic far-reaching and longer term. Their scope is the entire credit union so CEOs and their executive teams need to be deeply involved to formulate new strategies invest in technology and train employees. Member Profitability Groups Not long ago I spoke at a credit union conference and my topic was Six Ways to Increase Profits with 10 C R E D I T U N II O N U N O N B U S II N E S S B U S N E S S People. One person took offense that I was speaking to a group of not-for-profit executives on the topic of profitability so I hope you re not offended by the profitability discussion I m about to embark upon. I know you are not for profit but you know as well as I do what the regulators want to see. More importantly profits enable you to impact your communities and serve disadvantaged members. So with those disclaimers in place let s get to it. I have previously written in this column about the need to segment members into profitability groups. I prefer four groups because they are easy to wrap my mind around and I typically use the football terms End Zone Red Zone Field Goal and 4th & Long to describe them. End Zone is 10 percent of your members and 90 percent of your profits. Red Zone is another 10 percent of members but only 20 percent of profits. Field Goal is about 30 percent of your members and 5 percent of profits and 4th & Long is about 50 percent of your members and takes away 25 percent of your profits. Creating these groups does not make value judgments on whether or not you should have them in your credit union. You should have them all and serve each one well. The profit groups simply provide a basic level of understanding around the practical and regulated reality called profitability. These four profit groups are fundamental building blocks of member portfolio management. You wouldn t dream of going to a board meeting without knowing your financial numbers and likewise you shouldn t dream of going without being prepared to discuss these member profit groups. MMA AR RC CH H 2 20 01 16 6 C U B U S I N E S S . C O M CEO VELOCITY TAB Let me show you why having this discussion about member profitability groups is so important. The dashboard below is from a member portfolio management system my team and I have constructed. You should be taking something like this to your board meetings. The bar chart in the top left shows the typical 90 10 split meaning 90 percent of profits come from 10 percent of members. The other metrics show numbers of households in each profit group high-level reasons for profitability cross-sell ratios and attrition risk. This particular information is at a high enough level for your board to understand and use to make meaningful decisions. Once they begin assimilating the information and letting it percolate for a while they will desire additional details. Changing the Conversation Member portfolio management changes the conversation in your credit union and in your boardroom. Instead of focusing on only financial metrics credit risk ALM and numbers of new accounts you can have very active discussions about your members. And those types of discussions will drive strategy innovation and ultimately profitability. If you read last month s CEO Velocity column you know Steve Hennigan of SACU has been having these types of conversations with his board for several years. It took some time for his board members to fully grasp the discussion. Now their paradigm has shifted however and SACU is much more member focused. Fueling Your Not-for-Profit Mission In closing let me just reiterate that I am not suggesting 11 C R E D I T U N II O N U N O N B U S II N E S S B U S N E S S MMA AR RC CH H 2 20 01 16 6 C U B U S I N E S S . C O M TAB VELOCITY CEO you use member portfolio management to focus solely on your most profitable members. What I am suggesting is that you take an approach similar to Doug Fecher at WPCU who has his team focus equally on the three levels of financial health that exist in his member base. Such an approach actually fuels your not-forprofitmission because it creates a much deeper clearer and actionable understanding of your members. Similar to what is happening at WPCU and SACU that understanding will help you and your employees take better care of your members. Next month I ll continue this discussion by showing how member portfolio management fits into a credit union s strategy and daily operations. Scott McClymonds of CEO Velocity coaching and consulting specializes in helping credit unions acquire and retain profitable members. His unique approach to member portfolio management enables credit unions to better understand and serve their members while building profitability and brand strength. Subscribers to Credit Union BUSINESS can ask Scott questions about how getting to know their members better can generate greater returns. He can be reached at 479.263.0774 or scottm ceovelocity.com. Scott M cClymonds and CEO Velocity help financial institutions like yours increase earnings member loyalty and employee productivity. Scott has helped hundreds of CEOs and senior managers find answers and solutions to tough questions like Who are your most profitable members and how vulnerable are they to attrition Where can you find m ore of them Are they already doing business with you How does your strategy need to be adjusted to improve your results by 20% or more What technology updates will give you the highest payback How should you develop your most promising leaders Email scottm ceovelocity.com to request a free paper on how to find and close earnings gaps in your credit union. scottm ceovelocity.com ceovelocity.com 479.263.0774 12 C R E D I T U N II O N U N O N B U S II N E S S B U S N E S S Scott McClymonds is one of the most creative strategists in the financial services industry. - Elio Spinello Principal RPM Consulting MMA AR RC CH H 2 20 01 16 6 C U B U S I N E S S . C O M COMPLIANCE UPDATE BY JASON SKEMP Compliance Focus on These Five This Year N What areas of focus will be critical for your credit union in the upcoming year Credit Union BUSINESS s compliance expert breaks down the Big 5 spheres your CU will have to tackle for 2016. Keep reading to find out what they are. Cybersecurity The amount of intrusions on companies from outside hackers has raised awareness of just how vulnerable members personally identifiable information truly is. Regulators including the NCUA are paying close attention to the increased number of cybersecurity incidents and are making protection of financial institution IT infrastructure systems and processes a top priority. Two things you can do to align the prioritization your credit union places on cybersecurity with that of examiners Get familiar with the FFIEC s cybersecurity assessment tool and use it on at least an annual basis. The NCUA has said it plans to include the assessment in exams. Establish or update policies and procedures for responding to unauthorized access to member information. o doubt this year will present another regulatory compliance juggernaut. Focus and prioritization are a credit union s best allies when it comes to keeping the heads of staff above water. What follows are five critical areas of focus every credit union must tackle this year. Bank Secrecy Act (BSA) This area has long been a top priority for state and federal examiners and their attention to detail on all things BSA is only expected to intensify as the U.S. continues to fight criminal and terrorist activity. Therefore buttoning up your BSA compliance strategy this year is a sound use of compliance resources. In fact CUNA recently referred to BSA compliance training as an issue with no room for error. A few areas to which examiners are applying additional scrutiny Regulators may have a questionnaire that will help them with their examinations. Examiners will want to see that the credit union is following the FFIEC BSA Examination Manual requirements. Credit unions with money services business (MSB) relationships face additional risks so examiners will want to see that staff has the appropriate training to handle these accounts and that systems are in place to monitor them. 13 C R E D I T U N I O N B U S I N E S S M A R C H 2 0 1 6 C U B U S I N E S S . C O M TAB COMPLIANCE UPDATE TILA-RESPA Integrated Disclosure Rule (TRID) TRID became effective in October of 2015 so every credit union that provides real estate loans must follow the new requirements for estimate and closing disclosures. While NCUA and CFPB examiners may be taking it somewhat easy on credit unions at the outset of the year that s likely to change as we continue through 2016. Are your documents up to date Check to be sure The loan estimate contains Truth in Lending disclosures as well as the Good Faith Estimate. The closing disclosure contains Truth in Lending Fair Lending disclosures as well as the HUD-1 Settlement For credit unions compliance with fair lending is becoming more complex. Not because of any changes Statement. to the regulations but because multiple enforcement Unfair Deceptive or Abusive Acts or Practices actions have changed the way lenders have to think about fair lending. Complex algorithms are used to (UDAAP) This particular regulation has been a major focus of uncover potential fair lending violations with regard the CFPB which has been on the lookout for financial to approvals and denials as well as to the terms and services organizations it perceives to be less than conditions of a loan. forthright with consumers. The agency has penalized Credit unions may Consider moving from manual to automated loan offenders with multi-million-dollar fines as a result of approvals to avoid any perception of bias. negative exam findings. Review loan programs to ensure they are not Because UDAAP covers many different areas of a intended for only a certain demographic. credit union it can seem like an overwhelming prospect Design inclusive marketing campaigns. to ensure every staff member is aware trained and Train train and retrain staff. following written policies and procedures. Yet it has A colleague of mine recently characterized these five to be done. Consider tackling each department or area independently. So long as your review is completed within a reasonable timeframe you are demonstrating a good faith effort at UDAAP compliance. Be sure you are looking at these areas at a minimum Marketing Sales scripts Loan servicing (mortgage especially) Product and service agreements and disclosures Debt collection Complaints and responses to those complaints 14 C R E D I T U N II O N U N O N B U S II N E S S B U S N E S S MMA AR RC CH H 2 20 01 16 6 C U B U S I N E S S . C O M COMPLIANCE UPDATE TAB focus areas as something old something new. BSA fair lending and UDAAP long-standing areas of significance for credit union compliance teams are paired with the new TRID and Cybersecurity. This mix may bode well for credit unions as some of these five areas very well could be in good shape. The trick is to ensure they stay that way while also setting strategy for emerging areas. With focus and prioritization it can be done and credit unions will continue to be the best choice for consumers shooting for financial success. Jason Skemp is manager of compliance solutions for PolicyWorks a national leader of credit union compliance solutions. He can be reached at jasons policyworksllc. com. 15 C R E D I T U N II O N U N O N B U S II N E S S B U S N E S S MMA AR RC CH H 2 20 01 16 6 C U B U S I N E S S . C O M CUSO S BY DR. RANDY THOMPSON CUSOs An option for improving credit union efficiency My first introduction to Credit Union Service Organizations (CUSOs) was in 1986. I was beginning my practice as a consultant and my first client had organized a CUSO to provide investment counseling to members. This CUSO had two primary purposes (1) to help members to make good investments and (2) to generate income for the credit union. in all examinations. Credit Unions are required to select and implement a system that is appropriate for their respective balance sheets. They are also required to use that system to set appropriate IRR limits and then model the impact of new products and services on IRR prior to implementation of the offering . The second issue is the effective and accurate pricing of loans and deposits. For too many years credit union have employed a looking over the fence methodology for pricing both loans and deposits. I recently attended a credit union roundtable where a credit union CEO told of a loan promotion his credit union offered with a rate of 1.99% for all members. His statement at the end of the discussion was telling we didn t make any money but we made a lot of loans . NCUA has O ver the years I have seen a multitude of CUSOs focused on a variety of services. These have included the generation of mortgage and member business loans indirect lending investments services and sharing of core services. Again in each of these cases the primary goals were to serve members and generate income. These are notable and worthy goals. Recently my conversations with CEOs regarding CUSOS has shifted a bit. Yes income generation continues to be an important objective but with the changing nature of the credit union world (more regulations more oversight and more requirements) the goal of CUSOs needs to expand to further support the successful operation of credit unions. That new goal that I think needs to be added is an efficient response to regulatory requirements. Let me address just a few of those requirements. The first issue is the overall management of Interest Rate Risk. We all know that this is a hot button issue for NCUA. Identifying and quantifying interest risk is a basic issue 16 C R E D I T U N I O N B U S I N E S S M A R C H 2 0 1 6 C U B U S I N E S S . C O M TAB CUSO S instructed Credit Unions that risk based pricing rates should include all costs and a return . The third issue is the ominous task of keeping an expanding volume of policies complete and up to date. With expanding regulations coming from state and federal regulators it is an increasing challenge to update policies and assure that they are consistent with those regulations. It has been the case in too many smaller credit unions that the job of compliance has fallen on the shoulders of CEOs who are already far too busy. In many cases the CEO is spending up to 50% of his her time on compliance. Compliance is a non-income generating activity. Hence the time a CEO could be spending generating income from loan growth or better investment practices is consumed by policies. An answer to these three issues can be found in CUSOs. By combining resources credit unions may create efficiencies to address each of these issues in a less costly way. An example is TCT Risk Solutions. Eleven credit unions combine resources to create responses to all three of these issues. For ALM the CUSO has placed multiple IRR management tools on line. Included are (1) Liquidity management tool (2) IRR limits calculation tool and (3) IRR modeling simulation tool. Credit unions can simply access these tools online for an efficient and validated IRR solution. For Loan pricing the CUSO has placed a loan pricing tool online. By providing a full assessment of all costs associated with a credit union s lending activities the tool helps credit unions charge rates that will assure a healthy return. Online delivery improves efficiency as well. For Compliance work the CUSO has created a Compliance Solution that employs seasoned Compliance Officers who can write and update policies in a fraction of the time spent by CEOs. This frees the CEOs to spend time on income generation to strengthen the credit union. CUSOs are a foundational part of the credit union movement. For years they have improved the successful delivery of services to members. Expanding the use of CUSO to support efficiencies and free up CEO time is a continuation of this purpose. Dr. Randy Thompson is a member of VirtualCorps.com. For inquiries please contact arapp virtualcorps.com or call (406)-315-2809 17 C R E D I T U N II O N U N O N B U S II N E S S B U S N E S S MMA AR RC CH H 2 20 01 16 6 C U B U S I N E S S . C O M CU COOPERATIVES BY JEFF KLINE MEMBERS Development Company Collaboration in Action T Still thinking of other credit unions as the competition In terms of value addition there may actually be strength in collaborative numbers. Read on to discover why pooling your resources ideas and expertise with other CUs could strengthen your overall member experience and help you compete with your real competitors. hose of us who work on behalf of credit unions learned terms like cooperation one member one vote and mutual self-help in the early days of our careers. Starting with no capital people of ordinary means pooled their savings and earned dividends while those who needed to borrow had a ready resource to draw from. Of course the financial industry has become much more complex than it was a century ago for both the for-profit sector and the cooperative community. But the premise behind our cooperative model continues to work today. However our industry doesn t always practice collaboration at the professional level often out of fear of giving away a competitive edge. Yet it s rare for credit unions to truly compete with each other. There s plenty of market share to go around even with record shares of more than 1 trillion U.S. credit unions have less than one-tenth of the deposits of the nation s top four banks. Collaboration brings greater value. At MEMBERS Development Company we help credit unions pool their resources ideas and expertise to offer members not only affordable products and services that enhance their financial wellbeing but also the convenience of today s technology. For me working in the credit union community has always been gratifying but partnering with some of the nation s largest credit unions to work for the good of their members and 18 C R E D I T U N I O N B U S II N E S S B U S N E S S prospective members is an exceptional experience. In the past year MDC has gained 10 new owners with others in the pipeline evidence that collaboration is still a very good idea supported by many credit unions. Members win when credit unions work together and our three newest members clearly agree. Wayne Gross President CEO of Bethpage Federal Credit Union in Bethpage N.Y. says his credit union decided to partner with MDC based on its expertise and personal experience with management. We look forward to working collaboratively with MDC s owner credit unions which have demonstrated a proven track record of innovation said Gross . MM A R C H A R C H 2 20 01 16 6 C U B U S I N E S S . C O M CU COOPERATIVES James Nastars President CEO of Meritrust Credit Union in Wichita Kan. says the deciding factor was teaming up with MDC and its owner credit unions on a special project. Very simply it s knowledge he said. We benefit from the combined research and development of nearly 50 progressive credit unions and in turn we are able to deploy our resources to help bring meaningful initiatives to reality. For Denver Colo.-based Public Service Credit Union the key attraction was its ability to add value to the industry the credit union and ultimately its members. Partnering with MDC gives us scale to help us compete not only with the deep pockets of large traditional financial services competitors but also with those who are taking aim from outside the industry said Todd Marksberry President CEO of Public Service CU. Member engagement is a top priority. One of MDC s most recent initiatives centers on understanding member engagement. Our research shows that engaged members result in a 23 percent increase in profitability and relationship growth. Conversely disengaged members have a negative effect costing the credit union as much as 13 percent in income and product usage. Among the key factors that help engage members are providing a satisfying experience in all the channels they use and offering personalized service that takes into account their wants and needs. Member experience Like all consumers most members use a variety of access points to do their banking. So whether they visit in person make a phone call go to the ATM use their smartphone or sit at a desktop it s vital to ensure they can easily move from one channel to another. At MDC we ve found that engagement drops by 30 percent when any channel a member uses isn t up to par. That means credit unions need to not only pay attention to how a member accesses his her account but also provide a familiar look and feel across all channels. Personalization MDC s research shows that C R E D I T U N I O N B U S I N E S S Cooperatives serve their members most effectively and strengthen the cooperative movement by working together through local state regional national and international structures. Sixth Cooperative Principle members who feel their credit union knows them are much more likely to feel engaged. And if they re engaged they are less likely to switch to another institution. They are also more likely to talk up their credit union with their friends and family. Yet a 2015 study by IBM and Econsultancy revealed that only 22 percent of consumers say the average retailer understands them as individuals. People also are apt to make purchase decisions in favor of brands that send offers that apply to them but the study reported some 80 percent of respondents say the marketing messages they receive aren t relevant to them. Personas One way MDC and its owner credit unions have been working to overcoming this hurdle is by creating personas for different generations of members. Along with our other research personas help us better appreciate members needs and wants. Using Millennials 19 M A R C H 2 0 1 6 C U B U S I N E S S . C O M CU COOPERATIVES as an example we know they tend to be the least engaged with their PFIs. Not only are Millennials put off by inferior technology but they also tend to be annoyed by promotional offers that don t relate to their interests. And yet Millennials desire personalization more than any other generation At 83.3 million strong this age group has supplanted Baby Boomers as the largest generation. Clearly this is an area where personalization can improve member engagement. As financial cooperatives credit unions historically have had a major advantage over banks because their members are also their owners providing more opportunities to build deep relationships. But as new technologies remove some of the natural touches members receive at their credit unions credit unions will have to work harder to cultivate member connections especially with younger generations. But all of this takes time and money. By pooling their resources credit unions are able to imagine what s next in financial services. MDC s collaborative approach encourages participants to jointly explore possibilities and then research and develop projects that make sense. That s a huge benefit. For most credit unions it would be too costly and time-consuming to do this on their own. But isn t that what collaboration is all about Jeff Kline is Chief Executive Officer of MEMBERS Development Company an R&D CUSO of 40 credit unions and partners. Learn more the power of credit union collaboration at membersdevelopment. com. 20 C R E D I T U N I O N B U S I N E S S M A R C H 2 0 1 6 C U B U S I N E S S . C O M BUSINESS CONTINUITY BY JAMES GREEN People Often the Forgotten Aspect of Business Continuity Think your credit union has all its bases covered when it comes to bouncing back from a crisis There may be one important factor you re overlooking your work force. Read on to find out why there is such a disconnect between what you think would happen with them during a disaster and what likely actually would. A s a leader in your organization you probably sleep comfortably at night knowing your company is prepared in the unlikely event of a disaster. You store critical information physically offsite or in the cloud you have multiple branches you have disaster recovery plans for your systems and you even test them on a regular basis. Just the other day your CIO commented that your resiliency is best in class. You haven t overlooked a single thing. Or have you In a 2014 survey managers were asked In the event of a disaster what percentage of your employees would return to the office once it reopens or would be willing to relocate to a secondary location The most common answer was 80 percent of employees. But using history as a gauge of what is to come the reality is that you would be lucky to have 15 percent of your workforce return to work or relocate in the event of a disaster. This means that in a company with 100 employees you may have overestimated your available work force by a staggering 65 people at a time when the business is already in crisis. Why such a disconnect Let s look at three common issues A Different Perspective on Absenteeism Many companies project absenteeism rates during an emergency without considering the geographical uniqueness of not only their office s physical location but also where their employees live. But an office with the lights on and no people is as bad as an office full of people with no lights on. For example if your office is near a river that is prone to flooding how many employees live in an area that would be affected by that same flood The reason absenteeism rates are usually underestimated is that companies tend to focus primarily on getting their facility back up and running as soon as possible. But as an employee if MY house is flooded if MY house has roof damage if I need to have a claims adjuster onsite at MY house I am not 21 C R E D I T U N I O N B U S I N E S S M A R C H 2 0 1 6 C U B U S I N E S S . C O M BUSINESS CONTINUITY coming to work that day. So take a look at where your employees live in relation to your office. Do you share the same risks Not Business as Usual Your office and branches are back open your employees homes are in the process of being repaired but they are still not coming to work. Why Companies who call their employees to let them know the office is now open often forget to ask critically important questions such as Do you have running water What about electricity Do you have clean clothes Do you have access to food and water Do you still have transportation to work Often times your employees may want to return to work but are embarrassed to do so without the ability to bathe or wash clothes. Most natural disasters include a loss of power and with that drinking water and the ability to cook a meal are lost too. If your employee is focused on how to get his or her next meal going to work is going to be far down his or her list of priorities. Also if my car is underwater as a result of the aforementioned flood I may be ready and willing to work but don t have a way to get there. Or perhaps my child s school is still closed and I can t leave him or her at home alone. In the event of a disaster consider ways that you can help your employees overcome these challenges. a jarring experience for those who do. The American Psychological Society states that normal reactions to a disaster may include tense unpredictable feelings flashbacks trouble concentrating or making decisions disrupted eating and sleeping patterns strained personal relationships and physical symptoms such as headaches nausea or chest pain. If your employees are mentally or emotionally overwhelmed returning to work may not be a priority to them just as with the issues previously mentioned. So what can you do You may already have an Employee Assistance Program but companies often forget to use it during a disaster. The Red Cross also deploys Mental Health Teams to areas that have experienced an event and other non-governmental organizations (NGOs) do the same. So make sure you are addressing not just the physical needs of your employees but the mental and emotional ones as well. Preparing for what happens to your employees during and after a disaster is as vital to your business as the preparations you make for your systems and equipment in the case of the same event. One is irrelevant without the other to you and also your members. Having a realistic and thoughtful business continuity plan that includes all aspects of your business will help you get back to business as usual much sooner than your competitors. James Green leads the business continuity program at PSCU. He is passionate about life safety and helps the C-Suite understand the importance of business continuity not just during an emergency but as an integral part of day-to-day operations. James attended Northeastern University and holds both the Certified Business Continuity Professional (CBCP) designation from the Disaster Recovery Institute International and the Credit Union Enterprise Risk Management Expert designation from the Credit Union National Association The Hidden Factor Your business is back up and running your employees homes are in reasonably good shape and life is on its way back to normal. So why are people still not coming to work One aspect of disasters that is often overlooked is the mental trauma and anguish they can inflict on people. Most people will be fortunate enough to never experience a natural disaster but it is 22 C R E D I T U N I O N B U S I N E S S M A R C H 2 0 1 6 C U B U S I N E S S . C O M CU TRAINING BY KENNETH C. BATOR Why Is Our Strategy .... When it comes to strategic planning for your credit union there is no middle ground. It absolutely must be done well diligently so. If your CU s current strategy is not quite working these three recommendations can help turn it in a more focused direction. I just wrote that for the regulator. This is an actual quote from a conversation I had with a credit union CEO nearly five years ago. That was his response when I commented that the written plan seemed very sound and then asked Why are we not achieving our goals I appreciated the honesty. And despite the opinions of a couple of my close friends during college I m not na ve enough to think that this CEO was alone in that sentiment. Some tasks need to get done well. Some tasks need to get done diligently well. And some tasks just simply need to be done period. However strategic planning is a task that falls within that middle category. The process can be valuable if we are diligent in our approach not only during the actual planning session but also before and after the meeting. Looking at strategy as a practice or a progression rather than simply a one- or twoday program is what leads to implementation and execution. After nearly 15 years of facilitating strategic planning sessions and writing plans here are three of the primary reasons I have witnessed as to why some strategies just don t work 1) It was a formality. I ve heard and seen it before. It goes something like this Every year the board and executive teams go to Metropolis Gardens near the mountains. It s a great time. We always look forward to it. We golf on Friday. There is a big reception and dinner on Saturday night. We even head into town with a few of the couples on Sunday and look at antiques. Oh and we hold a strategic planning session on that Saturday morning too. Don t get me wrong. I don t have a problem with what I call the junket. In fact I encourage it. There is value in getting offsite. If done properly it does create comradery and allows people to come together as a team. And yes the volunteers certainly deserve it too. The problem comes when the junket is the process and not simply a portion of the overall progression. If we come back with nothing more than memories pictures and a strategic plan that will collect dust in a binder at the end of the CEO s desk then that s an issue on a number of levels. 2) We had good intentions but life got in the way. The management team came back pumped up after the session. The CEO reported the results from the 24 C R E D I T U N I O N B U S I N E S S M A R C H 2 0 1 6 C U B U S I N E S S . C O M CU TRAINING TAB Metropolis-Gardens Getaway Session including the strategic direction and the credit union goals for the year during the all-staff meeting. The goals along with a letter from the Board Chairperson are published in the employee newsletter or intranet. The entire team seems motivated. Then just two days later at 3 00 a.m. the pipes freeze and burst in the main branch. Two weeks later three managers resign. One heads to the rival financial institution down the street for a bigger salary and the other two announce their surprise engagement and run off together to follow their dream to operate a Tilta-Whirl for a traveling carnival. Hey who can blame them But everyone now needs to pick up the slack for the three vacant positions. A number of employees pitch in to help but in all the turmoil management forgets about a crucial letter that needed to be sent about fee changes that went into effect on February 1st. Now after finishing the third conversation of the day with irate members on their statement charges the CEO takes a breath looks over at the written strategic plan and realizes none of it has been implemented. for breakfast your strategy for lunch and there will be no dinner That s why I was inspired to develop the B C S Formula concept about five years ago. I had witnessed too many brand initiatives and strategic plans that were doomed from the start. Depending on the situation the B and the S in the formula can become doomed for a multitude of reasons. The employees weren t engaged and the strategy was just one more thing shoved at them from management. The CEO was retired psychologically at least but was still there physically rarely leaving the office except to grab another cup of coffee. Or there was no one on any level of the organizational chart who truly had the personality and passion combination to rally the entire team behind the credit union vision. All right as one manager early in my career would often say don t come to me with a problem unless you have a suggestion or two on how to fix it. So let s say we have an epiphany and realize that we re about a quarter of the way into the year and our strategy is ... well let s just say not going the way we would like. Here are a few recommendations Get staff involved. People support what they help create. This quote from Lee J. Colan in his book Leadership Matters is spot on. If the strategic plan is just one more thing that trickles down to the 25 3) Nobody really cares. In 2012 Shawn Parr wrote an excellent article for Fast Company titled Culture Eats Strategy for Lunch. I go one step further in that I believe a passive or poor culture will eat your brand C R E D I T U N II O N U N O N B U S II N E S S B U S N E S S MMA AR RC CH H 2 20 01 16 6 C U B U S I N E S S . C O M TAB TRAINING CU frontlines from the executive suite all that is going to do is reinforce the I m just here for a paycheck mentality among most of the employees. In an ideal situation I encourage management to get staff involvement before the session and after to share specifics on how employee suggestions shaped the discussions during both the session and the final strategic plan. In my first credit union job in 1993 after working at a very large and well-known bank where a lot of plain stupid stuff was dictated from the New York City headquarters to the branches I was pleasantly shocked. At the age of 23 and just a few weeks into the job my manager explained that the executive team and the board were heading into a strategic planning session in a few weeks and that they would like input from everyone. When the strategy was presented during the all-staff meeting I truly did consider that I played a small part in the process and that I wasn t just listening to a decree as I felt I had been doing in all of my prior jobs. (And yes today even after more than two decades of experience and a little more wisdom I still do believe that New York bank shoved a lot of stupid stuff down to the branches.) So even if the staff wasn t originally involved in the creation of the strategic plan it s never too late to start. Share the key points of the plan. Ask for input. Discover where there may be obstacles to execution that weren t considered during the strategic planning retreat. If the team isn t used to this level of engagement 26 C R E D I T U N II O N U N O N B U S II N E S S B U S N E S S it may seem like pulling teeth at first. They may be apprehensive or even afraid to speak up. Don t stop asking for input. Give employees an anonymous option to provide feedback if needed until a more open culture of communication is embraced. Start over. I used to write a number of plans that spanned well over 100 pages. I still do for some clients but not very often. While I do believe there still can be value in the traditional three- to fiveyear written plan the fact is that the world we live in now may very well throw a major change our way in three to five months. That realization has driven a number of Millennial entrepreneurs to shun writing the 127-page business plan for a twopage business brief. That may be to the chagrin of many investors of the Baby Boomer generation but it makes sense. This is why I suggest my clients use a Strategic Map. Think of it like the CliffsNotes to the strategic plan. The Strategic Map is simply one piece of paper with critical components of the company s unique B C S Formula on each side. This example comes from one of my clients. The first page focuses on three organizational drivers the Mission Vision and Values. The other side of the Strategic Map focuses on a key piece of the strategic plan the goals. The beauty of the Strategic Map is that if circumstances drastically change you simply create a new one rather than rewriting a 100page plan. It allows the credit union to in essence start over. The board of directors and management decide to alter direction based on some new critical information Create a new map. The economy takes a turn in a significant way positive or negative that wisely forces a change in strategy Create a new map. Three managers get canned for drinking too much bubbly during the credit union holiday party Well you get the picture ... and yes this does happen. The point being the Strategic Map allows for quick flexibility and change without going back and rewriting the entire strategic plan. MMA AR RC CH H 2 20 01 16 6 C U B U S I N E S S . C O M CU TRAINING Find a champion. For any strategy to be implemented executed and not become stale someone from the executive ranks has to rally the team to achievement. Usually that is the CEO but what if the person in that role is more reserved maybe more of a C personality type on a DiSC assessment Then we need to find someone else within the organization who can play the part of the strategic champion. I have seen COOs CMOs CFOs EVPs SVPs etc. take on that role with success when the CEO is more reserved. What if there really isn t someone in the organization who could naturally be that champion Then the CEO needs to tap into whatever D and I he or she has even it is temporary until someone more apt to naturally fill that role is discovered. DiSC theory teaches us that each individual has a portion of every component. Some parts of our personality are simply more pronounced. Great leaders have been known to borrow from some of their less dominant traits simply because they realized that is exactly what their organizations needed at that time. Even if the strategic plan was originally written only because the regulator said so dust that thing off. Review it and determine if it is still valid. Implement what is still relevant and throw out the rest. Maybe even begin anew. It almost certainly isn t too late to begin steering the ship in a more focused manner. Ken has more than 20 years of experience in helping organizations make money save money and survive internal challenges and tough economic conditions. As a facilitator for training and strategic planning sessions and an expert in brand concept culture building and management Ken has helped hundreds of organizations since 2001. In addition to his career of working with CEOs CFOs and COOs he has also served as an executive of three different financial institutions throughout the country and has assisted many small- to medium-sized businesses to reach new levels of effectiveness. Ken is also a co-founder of the Police Officers Credit Union Association and author of The Formula for Business Success B C S The Pocket Guide to Strategic Planning The 90-Day Quick Fix for the Business Owner or Manager and The Strategic Planning Workbook and Guide for Financial Institutions. His articles have appeared in many trade publications including Lifestyle Entrepreneur Magazine The Credit Union Journal and ABA Bank Marketing. Born and raised in Chicago he earned a Bachelor of Science in Finance and an MBA in Entrepreneurship from DePaul University as well as a Certificate in Integrated Marketing from the University of Chicago. 27 C R E D I T U N I O N B U S I N E S S M A R C H 2 0 1 6 C U B U S I N E S S . C O M MEMBER BUSINESS LENDING BY RYAL TAYLOE Winds of Change Are Blowing in Portfolio Risk Management O Major regulatory changes are coming in 2016 that will impact credit union portfolio monitoring. Is your CU prepared to adequately meet these new requirements Keep reading to find out how to leverage cloud-based technologies to make portfolio risk management a breeze for your CU in spite of all these changes. A couple of significant regulatory rule changes are scheduled to be announced early in 2016 signaling a potential sea change in credit union portfolio monitoring. Credit unions need to act now to analyze their current systems and processes and assess whether they are prepared to adequately meet the new requirements. ne of the unique characteristics of member business lending as compared with traditional consumer or mortgage lending is the need to regularly monitor risks both on an individual relationship level as well as across the entire loan portfolio. Business lending is not a one and done exercise. It demands a high level of due diligence upfront gathering and review of business tax returns and or audited financials collection of personal tax returns from all principal owners rigorous analysis of business financial ratios property site visits review of the business plan collateral appraisals and an assessment of the creditworthiness of the guarantors. Then once the documents are signed and the proceeds are granted your credit union must continue to monitor the relationship on at least an annual and often more frequent basis. At the portfolio level extensive risk monitoring is also required. As an organization builds relationships and adds loans to its books concentration analysis takes on a greater level of importance. Inherent risks based on geography industry sector loan type collateral type and member relationship size must be reviewed periodically and managed for overconcentration. However the key challenge for most commercial lenders today is this With business loan data spread among multiple systems and documents (including Excel Word paper documents and core systems) how can you possibly expect to effectively monitor risk within the portfolio 28 C R E D I T U N I O N B U S I N E S S Two Major Regulations Are Coming The first of these major changes is the Financial Accounting Standards Board s (FASB s) upcoming Current Estimated Credit Losses (CECL) guidance. The goal of CECL is for financial institutions to begin analyzing credit loss risk across their loan portfolios in an effort to help prevent future systemic failures such as those seen during the mortgage crisis of 2008. From a practical standpoint CECL will impact how credit unions handle their allowance for loan and lease losses (ALLL) calculations by requiring them M A R C H 2 0 1 6 C U B U S I N E S S . C O M Introducing The Team Builder from CU Business Magazine Helping to strengthen credit unions and their communities. VIEW FROM THE CROW S NEST COMPLIANCE UPDATE LENDING SOLUTIONS MARKETING MATTERS TECHNICALLY SPEAKING BRANCH BUSINESS CFO CURRENCY CEO VELOCITY MEMBER BUSINESS LENDING BUILD YOUR TEAM Tim O Hara Publisher CU Business Dear Tim You know how much I enjoy reading your magazine which is always filled with helpful and timely articles Sign up at www.creditunionbusiness.com. Join hundreds of CUs across the country by sharpening the skill sets of your department heads by signing up to 10 team members to receive CU Business monthly eMagazine weekly eNewsletters and over 5 years of back issues on our website. We email each Team Member PDF versions of pertinent articles before they are published according to title CEO gets CEO Velocity and View from the Crow s Nest CFO receives CFO Currency Lending department gets Lending Solutions Marketing Executives receive Marketing Matters Compliance department gets Compliance Update Trainers receive CU Training Branch Supervisors get Branch BUSINESS. Cost is only 500 per year 20% of which is sent to Children s Miracle Network to be filtered to the CMN children s hospital nearest the CU s community. A Website Wall of Fame will credit each CU with the CMN donation citing CU name city asset base and CEO. With the new Team Builder program I ll be able to retain hard copies of your magazine and ensure that my colleagues receive helpful articles on a positionspecific basis I also think supporting the Children s Miracle Network is a wonderful idea Thanks again and keep up the great work Best Walter Walter Merkle Executive Vice President Northwest Georgia Credit Union Signing up is simple Send a check for 500 ( 100 of which goes to CMN) along with a list of names titles and email addresses of up to 10 team members. Or pay just 46.60 per month on any major credit card www. creditunionbusiness.com register. PO Box 2223 Palm Beach Fl. 33480 Or call 561-282-6015 1 MEMBER BUSINESS LENDING to forecast all potential loan losses at loan origination rather than following the current practice of not reserving until a loss is considered imminent. The major challenge here for most business lending credit unions is that data is currently spread among various and sundry technology platforms and documents. You cannot forecast what you can t see In the second major change the National Credit Union Administration (NCUA) has proposed a comprehensive rewrite of the member business lending rule (Part 723) with the stated goal of providing credit unions with a less prescriptive more principlesbased approach to compliance. On balance this is a positive development for leaders of mature experienced member business lending (MBL) shops who have been imploring the agency for years to move away from its prior one-size fits-all approach. However one can expect that when NCUA releases its final rule changes later this year they will be accompanied by a higher degree of examiner scrutiny of board-approved policies procedures and risk management processes. In fact my sources among credit union business lenders tell me that examiners have been pushing hard in the area of portfolio risk management in recent exams perhaps in anticipation of the soon-to-be-released MBL rule. The preamble to NCUA s proposed rule changes states The risk associated with commercial lending is dynamic due to changing influences on the market and operational conditions of the borrower. The proposed rule requires the credit union to establish policies and procedures to identify and manage risk at the inception of the loan and throughout the life of the loan. Specific callouts to portfolio risk management in the proposal include the use of loan covenants periodic loan relationship reviews and risk rating systems. With the impending implementation of these two major The 1 Solution for Member Business Lending ncino.com 30 C R E D I T U N I O N B U S I N E S S M A R C H 2 0 1 6 C U B U S I N E S S . C O M MEMBER BUSINESS LENDING pieces of regulation it is critical that credit unions determine now whether they can effectively mine the data in their business loan portfolios. Credit unions need to centralize their business lending operations within a single system that can keep track of all the data and files associated with commercial loans borrower info and related entities. Fortunately with the advent of new cloud-based technologies it is easier than ever for financial institutions to manage large complex business loan portfolios entirely online in a single efficient and fully compliant system. Microsoft Excel spreadsheets and Word documents with little consistency. Today the cooperative enjoys a more streamlined and organized loan process in all areas from underwriting to documentation and through to loan approval. As a result we are better able to serve our members needs says Jim Northington chief credit officer at Northwest. In addition our employees have experienced the time-saving benefits of the solution with the simplicity of pulling an audit trail for examiners. Convenient Features Make Cloud-Based Portfolio The Cloud Helps Reduce Regulatory Burden and Risk Management a Breeze Gone are the days where a credit union must rely on Improve Credit Monitoring Since implementing its cloud-based bank operating system several years ago Live Oak Bank ( 1 billion in assets out of Wilmington N.C.) has seen its regulatory burden reduced alongside greatly improved credit consistency. One hundred percent of Live Oak s regulatory and compliance policies accounting books and loan documents are now housed in electronic online files. Auditors and other third parties can easily and securely access documents through the cloudbased system. Live Oak has seen a 50 percent reduction in document exceptions reduced downgrades and a stronger watch list process. [Our cloud-based bank operating system] provides me wonderful tools for risk management says David Lucht chief credit officer. I can look at my portfolio on any characteristic and get an immediate picture of how the portfolio is doing on a real-time basis. That allows me to make better credit decisions on behalf of the bank. Northwest Federal Credit Union ( 3.1 billion in assets out of Herndon Va.) has experienced similar improvements in its portfolio monitoring capabilities. Prior to implementing its cloud-based business lending platform the credit union was faced with multiple manual processes spread across voluminous paper paper credit files and home-grown error-prone Excel spreadsheets to slice and dice its business loan portfolio. For financial institutions just starting out in business lending this old-school approach may be adequate for a period of time but once a shop gets above a few dozen loans on its books the time has come to transition to a more sophisticated online solution. Best-in-breed cloud-based technologies offer convenient features such as Single-system centralization All commercial loan data is housed in a single system including information on borrowers as well as related entities (guarantors owners and affiliated companies). Easy-to-use executive dashboards From credit analysis supervisors on up to the CEO busy leaders now have real-time customized access to only the data they need to do their jobs. Dashboards may be configured to show bird s-eye views of total portfolio makeup and concentration risks or to drill down to such critical operating metrics as time-toclose pipeline tracking and credit underwriting workflow. Automated tickler tracking Customized ticklers can be set up to track important milestones such as annual reviews financial statement requests 31 C R E D I T U N I O N B U S I N E S S M A R C H 2 0 1 6 C U B U S I N E S S . C O M MEMBER BUSINESS LENDING next site visits dates loan maturities and credit line renewals. An automated tickler system can turn the maelstrom of portfolio tracking into simply a gentle rustling of the leaves. Robust concentration risk monitoring reports With built-in custom reporting modules users are able to run on-demand as well as periodic reports that break down complex portfolios into digestible bites allowing credit union to focus their energies on the highest-risk categories of loans. Regulators are most concerned with whether your portfolio stays within the parameters of your credit union s self-defined policy limits. Through online reporting such tracking and monitoring can be done accurately regularly and conveniently. Document and credit file management All critical loan closing and credit file documents are digitally stored in the cloud for secure access from anywhere with an Internet connection. Files are intelligently indexed so they can be found quickly and easily. Easy communication among multiple organizations For credit unions that use a third-party credit union service organization (CUSO) to assist with underwriting annual reviews or portfolio management custom access can be granted simply by providing your partner with its own secure login credentials. Similar access can be provided to your credit union s loan participation partners to help them comply with loan due diligence and ongoing monitoring requirements. Annual review tracking As a business loan portfolio grows one of the most frustrating and challenging aspects is the annual review process. Keeping track of which loans need what level of review annually requesting updated financials and other information from borrowers pulling new credit reports and knowing exactly where each relationship is in the credit underwriting review process can be a logistical nightmare. Fortunately through cloud-based automated tracking systems and customized dashboard reporting this process becomes transparent efficient and much less painful. The winds of change are surely blowing in commercial lending and the credit union movement is about to feel the impacts in a major way FASB and NCUA have made that abundantly clear. And while some of the proposed changes are positive for the industry the challenge is for credit unions to manage their portfolio risks in an efficient way. Fortunately with today s cloud-based single-system loan origination and portfolio monitoring solutions the process is greatly improved. As a result you can focus on what s important to your board and members getting loans out the door and helping small businesses achieve their dreams. Ryal Tayloe is vice president of credit unions for Wilmington N.C.-based nCino the leader in cloud-based operating solutions for the financial services industry. Through its flagship operating system nCino leverages the power of Salesforce.com to provide credit unions and other financial institutions with superior transparency and clarity into their existing loan production pipelines portfolios and operating efficiencies across all business lines resulting in increased profitability productivity gains and regulatory compliance. For more information visit www.ncino.com or connect with the company on LinkedIn and Twitter nCino. 32 C R E D I T U N I O N B U S I N E S S M A R C H 2 0 1 6 C U B U S I N E S S . C O M BRANCH BUSINESS BY MEREDITH DEEN Branch of the Future The Traditional Office Will Be in the Mix M Forget what you ve heard about the future of the credit union branch. All those spaceagey predictions are not likely to come to fruition. In fact the traditional office branch will be here for a long time to come but it will be part of an individually tailored and dynamically mixed approach rather than one-size-fit-all. Here s how that might look. any interesting branch designs have emerged in the last few years to address consumers shifting financial needs teller-less offices and retail-focused spaces resembling an Apple Store more than a bank or credit union to name only two. Branches are changing and with good reason their transaction numbers are steadily falling as consumers perceive offices less necessary for their daily needs but important for in-depth product conversations and financial advice. Amid the change we ve seen predictions that the branch of the future all of the FI locations across the U.S. will someday look like something out of The Jetsons. But those forecasts won t likely come true. Branch banking data actually indicates there will always be a place for the traditional office alongside new branch designs as the financial marketplace evolves. Yes branches have experienced a 45 percent decline in transaction volume since 1991 according to FMSI s Teller Line Study. The number of branches in the U.S. has also declined by 4.8 percent since 2009 says the FDIC. And mobile banking is advancing quickly much faster than Internet banking originally caught on. So does that signal that branches especially the traditional office are quickly going the way of the typewriter No. The ratio of population to branches has declined from 9 340 in 1970 to 2 970 in 2014. This staggering metric is a result from a nearly 300 percent growth in the number of branches since 1970 while the population growth was nearly half of that. Coupling the decline in the ratio of population to branches and the recent decline in bank branches suggests that the market is starting to correct itself. It is going from being over branched and not shutting down branches when branch functionality became dated to being branch balanced. Branch Design Based on Market While many individual branches will likely see significant changes in how they operate over the next 20 years we believe the branch in the coming decades 33 C R E D I T U N I O N B U S I N E S S M A R C H 2 0 1 6 C U B U S I N E S S . C O M TAB BRANCH BUSINESS will not only be alive and well but will also in many ways be very similar to the branch of today. With 94 000 branches in the U.S. in 2014 according to the FDIC all with varying degrees of accountholder bases including different demographics socioeconomics and generational gaps combined with geographic difference it would be unlikely to see digital technologies cause a dramatic shift in how most branches operate in the coming decades. It is much more likely that financial institutions will continue to have a dynamic mix of branch types tailored to the individual branch goals and circumstances. What will certainly happen in the next decade is FIs will not go with a one-size-fits-all approach to branching. Instead they will rely on detailed analysis of the local market and consumer needs to choose the right type of office. They will look carefully at the demographics and socioeconomics of the area along with the potential competitive forces. For example in a more affluent area with a large Baby Boomer population a branch may benefit the most from increased sales training and branch sales acceleration technology investments. Conversely in another area with a predominantly younger population with little money to invest it might be a better idea to focus technology investments that drive a faster more secure and optimized branch environment. And in areas in which transactions are high and personal contact is desired by the customer base the traditional office will remain. FMSI sees the future of financial institution branches looking like this A Personalized Experience Upscale Branch Model equipped with tablets interactive touch screens branch activity tracking software and more A Self-Directed Technology Model equipped with smart ATMs video interactive tellers branch appointment software and more The Traditional Branch Model with forecasted staff schedulers lobby-activity tracking software branch appointment software and cash recyclers 34 C R E D I T U N II O N U N O N B U S II N E S S B U S N E S S Let s look closely at these three types of branches Personalized Experience Upscale Model Often referred to as the Apple Store in banking the Personalized Experienced Upscale Branch Model aims to create a comfortable and trusting environment where accountholders are impressed with hands-on white-glove-type treatment from associates. Other than the sleek design the key to achieving success with this branch experience weighs heavily on the caliber of staff who work there. Unlike traditional branches where activities are separated by divisions of labor teller activity lobby interactions this type of branch mostly requires universal employees who handle the full spectrum of the accountholder experience. Due to the increased per-employee cost of this model a financial institution needs to carefully consider the sales potential when rolling out these types of locations. As previously mentioned the branch account base needs to meet a number of data points to make a Personalized Experience Upscale Model a success. Such data points include a high enough income level and the right age range with accessibility to the branch. This office is especially ideal for a more urban or suburban setting. FMSI predicts that these specific and limiting requirements make it unlikely this office will be the dominate branch type in 20 years. Self-Directed Technology Model Probably what most of us imagine when we think of the branch of the future is the Self-Directed Technology Model where the consumer s experience is focused on extremely fast easy and secure interactions made possible by futuristic technologies. These types of branches generally have the most potential in highly populated areas where space is limited and transaction volumes are high. But scaledback versions of this model also give FIs an affordable option to expand their services to more rural areas. MMA AR RC CH H 2 20 01 16 6 C U B U S I N E S S . C O M TAB BRANCH BUSINESS With significantly fewer staffing requirements to keep these branches up and running banks and credit unions will experience sizable cost savings over time when compared to more traditional branch operations. Due to the affordability and reach of these types of branches FMSI predicts they will see significant increases over the next 20 years. certainly continue in the future especially with emerging sophisticated technologies. Tradition Remains So if you re thinking that someday in the not-toodistant future you ll need to toss out your traditional office think again. While branches are changing a number with a mix of new technology and specially trained staff to address specific market demographics and needs the traditional branch will have consumers to serve and a place within financial services for quite some time still. Ms. Deen is president of Alpharetta Ga.based Financial Management Solutions Inc. (FMSI) which provides financial institutions with business intelligence and performance management systems for efficient branch staff scheduling and lobby management. She can be reached at meredithd fmsi.com. Traditional Model An oldie but goodie this branch type is familiar to us all. A row of teller windows a roped-off line and a handful of desks and or private offices throughout gives this type of branch a functional layout that works very well for many markets. Like it or not this model is here to stay for a number of years. As of today the vast majority of branches operate in this way and with an average of 6 500 transactions per month according to the FMSI Teller Line Study they are still getting plenty of traffic. In fact FMSI sees from its client base that a number of its branches have actually experienced an increase in transaction volumes over the past couple of years possibly due to picking up customers from the mega banks. This model is most effective in handling as many face-to-face interactions as it can. And in an industry where a premium is placed on personal in-person exchanges it can generally lead to a healthy number of deposits and loan activity. FI management teams have spent an enormous amount of time and effort toward maximizing the earnings from traditional branches which will 35 C R E D I T U N II O N U N O N B U S II N E S S B U S N E S S MMA AR RC CH H 2 20 01 16 6 C U B U S I N E S S . C O M TAB REGULATORY TAB HERE TIPS HERE BY AUTHOR DENNISHERE BY NAME CHILD Resources Are Available to Help Carry the Burden of Regulatory Compliance T Is the small size of your credit union getting in the way of your regulatory compliance Staying viable under the present regulatory environment is proving a challenge for many CUs. But that doesn t mean you have to lay down the gauntlet. Outsourcing could be the key to continued operational efficiency. More regulations are resulting in fewer credit unions. The number of credit unions in the U.S. has dropped 40 percent in the past 10 years. Most of this decrease is accounted for by the number of small credit unions merging into larger credit unions or the reduction in the formation of new credit unions. It is predicted that there will be another 40 percent drop in the number of credit unions in the next 10 years. Government figures indicate that the country is losing one credit union or community bank each day. NAFCU contends that the passing of Dodd-Frank alone has accounted for the loss of 1 250 credit unions. here is mounting evidence that the present regulatory environment is making it almost impossible for mid-size to small credit unions to meet compliance expectations and stay in business. Regulatory burdens are harming credit unions in a couple of ways (1) the cost of compliance is driving credit unions out of business and (2) failure to comply can result in the loss of a CEO s job and or the demise of a credit union. Small and mid-size credit unions particularly will need to find methods to help them cope with the growing burden of regulatory compliance if they hope to remain viable. Credit unions under 250 million especially are struggling to sustain growth and profitability due to growing regulatory compliance requirements. They would clearly benefit from resources that are now available to help with compliance issues. Let s look at some facts supporting these affirmations 190 regulatory changes occur in eight years. CUNA reports that since 2008 credit unions have been subjected to more than 190 regulatory changes from nearly three dozen federal agencies totaling nearly 6 000 Federal Register pages. CEOs are worried. A 2014 survey of credit unions by CUNA indicates that regulatory burden is one of the top three worries for managers and boards. 36 C R E D I T U N I O N B U S I N E S S M A R C H 2 0 1 6 C U B U S I N E S S . C O M REGULATORYTAB TIPS Compliance costs make up 20 percent of total operating expenses and 40 percent of staff expenses. Obviously for small credit unions the impact on the bottom line is significantly higher. Lost opportunity costs make the losses even greater. Regulations are straining human resources. It takes more staff just to meet the compliance demands for regulations passed since 2013. Continuity a New Haven Connecticut-based provider of automated compliance solutions reports that credit unions needed 1.35 additional employees just to address the new regulations issued during the first three months of 2015. To address regulations and enforcement actions handed down in the past two years credit unions would have had to add 14 additional employees. Larger credit unions can accommodate this expense with moderate sacrifice. For small credit unions however it poses a significant strain on staff resources and profitability. Regulatory costs are massive. A CUNA study shows credit unions were hit with regulatory compliance costs of 6.6 billion in 2014. This same study confirms that compliance costs are reducing ROA by 49 basis points for an averagesized credit union. Compliance costs make up 20 percent of total operating expenses and 40 percent of staff expenses. Obviously for small credit unions the impact on the bottom line is significantly higher. Lost opportunity costs make the losses even greater. Credit unions cope with regulations that are not necessarily beneficial to consumers and the financial system. Large credit unions have enjoyed significant growth in their loan portfolios in the past three years. Small credit unions have not enjoyed the same revenuesustaining loan growth as their larger brethren. In fact Continuity reports that small credit unions are abandoning lines of business just because they cannot keep up with the time and cost it takes to comply with the rules governing those lines of business. These abandoned lines of business could well have contributed to the profitability of those credit unions. Regulatory compliance is indeed an expense. But it is not a cost with any form of return-on-expense that is associated with most other operational expenses. It can be argued that the real losers in an environment of onerous regulatory growth are the consumers as their community credit unions disappear and services are reduced. Furthermore it is argued by many industry pundits that more regulation does not necessarily benefit consumers contrary to reasons given for passing many regulations. In fact many argue that it was poorly drafted and misdirected regulations that led to the 2008 downfall of many financial institutions the Great Recession and tax-payer funded bailouts. In a final irony the 2008 panic has led to still more regulations of questionable benefit and an additional regulator for financial institutions to cope with the Consumer Financial Protection Bureau. More regulations and additional regulators ultimately could well result in a complete loss of autonomy for financial institutions. Fortunately while an individual credit union may not be able to do much about the growing number of regulations management can do something about the burden of compliance. Regulations are hurting employees of small credit unions. The burden of new regulations and the expense of the compliance is hurting employees of small credit unions in a couple of ways (1) they are being pushed into health plans as a result of the Affordable Care Act that are not as beneficial as the health plans they had 37 C R E D I T U N II O N U N O N B U S II N E S S B U S N E S S MMA AR RC CH H 2 20 01 16 6 C U B U S I N E S S . C O M TAB REGULATORY TIPS before and (2) when credit unions merge employees of the absorbed credit union often are allocated to less attractive positions or experience loss of their jobs altogether this is especially true of management staff. For management staff of struggling credit unions the stress can be overbearing as they contemplate the possibility of a merger. Furthermore struggling credit unions are hard pressed to pay competitive wages. This means competent employees are making a personal sacrifice on behalf of their employer or more commonly a credit union will need to settle for less-competent employees which places more strain on management and or means a poorer level of service for members who eventually take their business elsewhere. In turn the downward spiral of the credit union is further accelerated. Relief from the burdens of regulatory compliance would benefit employees at all levels. CEOs are devoting more time to compliance and less time to the traditional duties of a CEO. CEOs of mid to small credit unions report that they are spending much of their time addressing compliance issues and as a result are able to devote less time to operational efficiency and revenue-generation issues. Indeed CEOs of small credit unions take on the role of compliance officer themselves because they cannot afford to hire staff devoted exclusively to regulatory compliance. This means the majority of a CEO s time is no longer being used as it should be. Outsourcing compliance could be the most efficacious alternative for a small credit union. CEOs need to consider the benefits of outsourcing Loan Originator training You ve got this. Do you still need to satisfy your training requirements Look no further than the comfort of your own office. A new NMLSapproved self-study course is specifically designed for credit unions and meets the continuing education requirements of Reg Z. Enroll today at www.cuna.org MLO Check it off your to-do list Enroll today at www.cuna.org MLO OFFERED BY INSTRUCTED BY The services provided by PolicyWorks should not be construed as legal services legal advice or in any way establishing an attorney-client relationship. Making compliance easy for you. 866.518.0209 POLICYWORKSLLC.COM 38 C R E D I T U N II O N U N O N B U S II N E S S B U S N E S S MMA AR RC CH H 2 20 01 16 6 C U B U S I N E S S . C O M REGULATORY TIPS regulatory compliance so they can get back to what they were hired to do manage operations and generate revenue. Compliance is a growing profession. Other than the Bank Secrecy Act there is no formal requirement to employ compliance staff. Competent complianceofficer employees require constant training and education. Most small credit unions cannot afford the cost of hiring specialized staff and keeping those employees to the required proficiency levels that assure regulatory compliance. Outsourcing compliance is most likely a small credit union s most efficient method to meet regulations while maximizing limited resources. There are a growing number of firms that provide regulatory compliance services. When considering which firms would best meet their needs credit union CEOs should consider The number of years the firm has been in business and the level of experience the staff have in dealing with credit union management services and compliance Those credit unions the firm provides training and compliance services for Look for testimonials from present clients. Also look for firms that have been vetted by regulatory agencies. Giving special consideration to firms that have experience in training employees of regulatory agencies Firms that can also provide risk management services revenue enhancement tools and so forth Who owns the firm Is it owned by credit unions (CUSOs) for the sole benefit of credit unions or is it owned by non-credit-union entities The expanse of regulations the firm specializes in The broader the field a firm can address the better it can coordinate compliance issues. Other compliance-related services the firm can provide such as auditing and drafting regulatorycompliant policies and procedures staff and volunteer training and so forth Today s onerous burden of regulatory compliance need not be the death knell for small credit unions. For decades credit unions have benefited from outsourcing a number of operational and revenue-generating objectives thus assuring their ability to operate at the most efficient level possible. It is time to add regulatory compliance to the list of outsourced functions. Dennis Child Compliance Specialist TCT Risk Solutions LLC is also a member of VirtualCorps. com. The CUSO TCT Risk Solutions can be reached by contacting arapp virtualcorps.com or 406315-2809. 39 C R E D I T U N I O N B U S I N E S S M A R C H 2 0 1 6 C U B U S I N E S S . C O M LENDING SOLUTIONS BY LORRIE WOHFEIL Do You Know Your Community s FICO Score Take a minute to ponder the title of this month s article. You are most likely wondering why you need to know the average FICO score in the community in which your credit union resides. If you are like most you have an awareness of the average FICO scores and trends at your credit union. We are hopeful you are also averaging your net yield (gross yield after charge-offs) by product and paper grade. But why is the community important The vast majority of credit unions today tend to simulate their community. Whether the charter allows for community eligibility or the SEG employees reside in your community chances are your credit union is in fact very much a neighborhood establishment. Your credit union s average FICO scores should reflect your community FICO score. If not you may find your image in the community suggests it s too tough to get a loan. This can hamper your yield efforts right out the gate. If you have been following our articles you understand we believe strong net income is critical for credit unions. This doesn t take a rocket scientist to figure out. We also believe a strong loan yield particularly your net yield is the critical component. In fact even in times where rates are low and margins are squeezed a 6.5% net yield is possible. As prefaced above the need to track net yield is tremendous. Your findings will prove if they haven t already two key things Lower FICO scores result in higher yields generated Unsecured loans at any credit tier will produce the greatest yields What often tends to happen is that credit unions hide behind the type of member they have as a means to why they can t achieve a strong yield. This is often ill warranted rationale. My members have high FICO scores because of the community or SEG relationship. My members are wealthy. My members don t need loans. My members will only borrow from me if I have the best rate in town. Credit unions best rates are usually within 50 basis points of their investment yields. Investments don t incur much of any expense and are polar opposites of the expenses it takes to loan money out. Therefore we all have to get good at putting loans on the books with a larger spread over investments to build net income. So the million dollar question is can you have a strong yield if you reside in an area with high average FICO scores The presumption and logic provided above is that high FICO scores no debt. This fortunate for us is not always the case. According to Cardhub the top cities in the country with the highest credit card debts outstanding are 40 C R E D I T U N I O N B U S I N E S S M A R C H 2 0 1 6 C U B U S I N E S S . C O M LENDING SOLUTIONS 1. 2. 3. 4. 5. Beverly Hills CA Darien CT Westport CT Southlake TX Greenwich CT These five cities average household income is 158 000 and the average FICO score is 727 or A paper. Three of the five cities have average FICO scores above 730 or in the platinum tier or as we say in the industry the best of the best . What may surprise you Their average credit card debt is 12 285. This is 4 000 higher than the national average of 8 000 according to CardHub. The methodologies behind achieving strong yield differ based on the average FICO score in the community. This will be discussed in greater detail below. First off I want to share with you a credit union that many would think is stacked against the odds and to many observers would fall into the ill warranted rationale provided above. Let s take a look at the case study below Average income in the community where the credit union is located 152 156 versus the average income in the USA 65 900 This is the 10th highest income in the country. The average FICO score in the community 738 versus the average FICO for US 695 and yet they still have a yield of 6.1% versus 4.97% in their peer group Yes high yield and high FICO can co-exist Look at the proof below CU located in the Pacific Northwest asset size 396 million 10 in the US for highest credit card debt Average FICO 738 (99th percentile) Note Despite high incomes in their community their average share and loan balances are in the 22nd and 10th percentiles. They are serving the underserved despite the affluent area Peer Group (Sept) 11.04% 0.59% 70% Dec-11 Capital ROA Loan to Share Total Loans Outstanding Real Estate Loans Unsecured Loans Auto Other Loans Cash Equivalents & Investments Loan Yield Loan Income Loan Quality (Delinquency) Charge-Offs Fee Other Income Ratio Average Loan Balance Average Share Balance 11.29% 0.78% 69% 189 706 179 93 438 139 35 709 926 60 558 114 49.3% 18.8% 31.9% Dec-12 12.15% 1.26% 66% 185 502 233 90 474 381 37 073 624 57 954 228 48.8% 20.0% 31.2% Dec-13 12.68% 1.20% 63% 185 763 960 87 432 520 47.1% 39 118 274 21.1% 59 213 166 31.9% 157 136 766 5.93% 11 016 416 2.10% 1.49% 2.16% 8 840 5 765 Dec-14 12.86% 1.16% 66% 211 801 078 96 217 962 45.4% 48 012 807 22.7% 67 570 309 31.9% 153 076 390 5.73% 11 392 154 1.33% 0.65% 1.78% 9 021 5 861 Dec-15 12.64% 1.08% 62% 217 931 105 98 984 141 45.4% 48 640 951 22.3% 70 306 013 32.3% 185 229 447 5.74% 12 340 376 1.33% 0.47% 1.79% 8 829 6 136 Percentile (Sept) 76th 90th 40th 12 735 823 6.85% 13387611 2.99% 3.56% 2.18% 9489 5635 140 729 609 6.00% 11250308 2 57% 2.35% 2.90% 9191 5735 5.11% 0.95% 0.45% 1.82% 13 819 9 469 80th 77th 79th 73rd 22nd 10th 41 C R E D I T U N I O N B U S I N E S S M A R C H 2 0 1 6 C U B U S I N E S S . C O M LENDING SOLUTIONS This is How They Did It and Proof that If They Did It You Can Too Unsecured loans credit cards which make up 22% of their loans. Fee and other income make up anywhere from 1.82% up to 2.90% all this is non-interest income. Delinquency and charge offs are higher than their peer group yet the ROA is 1.80% versus 0.58% which is three times as high as peer group At Lending Solutions Consulting Inc we have emphasized in the past and continue to do so that lower losses does not equate to higher earnings. In fact the credit unions that make the most money typically have higher than average delinquency and charge-offs. This is because they have an attractive loan yield. How Your Building Income Strategy May Be Different Based on the FICO Score In Your Community High FICO Score Loan Ideas Credit cards with high limits Unsecured loans debt consolidation loans Low FICO Score Loan Ideas Dependable transportation for work Unsecured loans for unexpected expenses (emergencies i.e. car repairs) Credit cards with lower limits Overdrafts WHY Fixed income Lives from paycheck to paycheck Payment driven not rate driven Someone who will listen and come up with a solution WHY Members with high FICOs use credit cards and are given very high limits Cost of living is higher Living the good life House poor at times Nice cars Fancy vacations Keeping up the Joneses When it comes to mortgages and car loans they want the lowest possible rate How do we make money Taking risk without collateral Big debt consolidation loans no collateral (start at 9.95%) Credit card (interchange income) Rex is a great example 25 000 per month x 1.5% 375 x 12 4 500 You can t make a lot of money on A A members on car loans and mortgages. You have to make it easy How do we make money Has to get to work and will pay you if they can afford the payment Overdraft protection they will love it and you make a lot of money Make sure to have direct deposit Consider processing application fees Where do you stand to lose money Financing cars when they are desperate and have no idea of the condition. Diagnostic checks have to be done before you make the loan Large debt consolidation loans they haven t slowed down spending If you go back and look at the top cities discussed in this article what types of products would benefit their members Do the credit unions in their communities train employees on how to make debt consolidation loans Do they have limits that allow them to truly pay off their member s debts Are their employees getting the whole story and closing the loan in a manner where members understand their end of the agreement 42 C R E D I T U N I O N B U S I N E S S M A R C H 2 0 1 6 C U B U S I N E S S . C O M LENDING SOLUTIONS Optimal loan yield is critical moving into 2016. At LSCI we have never seen more scenarios where credit unions are working harder for less money. This problem is a lot easier to fix if you re not already 100% loaned out. There s no better case on why it s critical to understand your FICO score in your community and to tailor your yield building strategy to that score than the credit union s financials highlighted below Working Harder for Less Federal Credit Union Financial Snapshot December 2013 Capital ROA Loan to Share Total Loans Outstanding Real Estate Loans Unsecured Loans Auto Other Loans Cash Equivalents & Investments Loan Yield Loan Income Loan Quality (Delinquency) Charge-Offs Fee Other Income Ratio Average Loan Balance Average Share Balance 9.34% 0.43% 101.36% 428 900 000 217 000 000 34 000 000 176 000 000 50 000 000 4.87% 20 440 000 1.13% 0.82% 2.76% 14 800 5 300 December 2014 9.36% 0.69% 104.13% 467 600 000 222 000 000 38 000 000 207 000 000 41 000 000 4.70% 21 100 000 1.11% 0.44% 2.64% 11 700 5 300 December 2015 8.70% 0.24% 104.87% 517 990 000 234 000 000 42 000 000 241 000 000 47 000 000 4.48% 22 070 000 0.99% 0.49% 2.14% 12 000 5 500 Peer Group (Sept) 11.06% 0.82% 79.40% 4.48% 0.68% 0.39% 1.42% 16 947 11 695 Percentile (Sept) 25th 56th 94th 56th 77th 69th 93rd 32nd 2nd Yield Impact Year Dec 2011 Dec 2012 Dec 2013 Dec 2014 Dec 2015 Loans Outstanding 381 100 000 410 600 000 428 900 000 467 600 000 517 990 000 Loan Yield 5.95% 5.43% 4.87% 4.70% 4.48% Loan Income 22 000 000 21 500 000 20 400 000 21 000 000 22 000 000 43 C R E D I T U N I O N B U S I N E S S M A R C H 2 0 1 6 C U B U S I N E S S . C O M LENDING SOLUTIONS What can we learn from this credit union that s happening far too often for everyone With approximately 137 000 000 more in loans year end 2015 versus year end 2011 the credit union earned roughly the same income. That s a lot of work for to end up even. If the credit union had maintained the same yield from 2011 with the amount of loans they increased by in 2015 their loan income would have been approximately 31 000 000. This would equate to 9 000 000 in more income This credit unions average FICO score in their community is 680 or right on the average for the entire country. The average loan and share balances suggest there is plenty of opportunity to serve the underserved. What should their strategies be to drive up yield o Promote unsecured loans (they currently have 8% in unsecured loans which is less than half our recommendations) o Perform some average FICO trend analysis on their auto loans. Auto loans can be lucrative but not if the majority are in A or A paper. o Drive up deposit growth so they will have funds to start building higher yielding loans into the portfolio o Look at pricing and make sure they are appropriately getting compensated for the risk Listed below we have provided you with a simple checklist to ensure your appetite for risk is where it should optimally be and your stage is set to grow yield in 2016. Maximizing Yield and Appetite for Risk FICO mix (a.k.a. Appetite for risk) A A 50% (focus on unsecured loans and credit cards which will yield you 9.5%) B C 30-40% D E 15-20% (focus on collateral especially cars when possible and you will earn 12.95% up to 17.95% plus save the member money. Take more risk on D E when the members have a stable job and you have direct deposit.) Optimal Portfolio Breakdown Real Estate 40% Unsecured 20% Auto 40% Here is the link to view the average FICO scores in your community https wallethub.com free-credit-score. (Scroll to the bottom and click View all cities ). I hope you take the time to look your credit union up and see what the average score is in the town the majority of your branches reside. The good news yield is there for the taking whether you have a high average FICO score or low average FICO score. The approach is simply a little different. Take the time to educate your staff on what approach works best for you based on your current financials product breakdowns etc.... Let s make 2016 the year where we all work smarter not harder For more information on FICO scores and FICO trends please contact Lending Solutions Consulting Inc for customized training and class offerings. Rex Johnson s acclaimed University of Lending class for 2016 has an all new manual covering in detail the discussion of this article. Please visit our website at www.rexcuadvice.com. 44 C R E D I T U N I O N B U S I N E S S M A R C H 2 0 1 6 C U B U S I N E S S . C O M TAB Lorrie Wohlfeil began her career at LSCI in August of 1995. Lending Solutions Consulting Inc. (LSCI) is the industry leader in providing consumer lending advice to credit unions across North America. As a business analyst Lorrie is primarily in charge of the Portfolio Analysis program an external audit dedicated to helping credit unions make stronger loan decisions and seek sales opportunities. Lorrie also works hand-in-hand with our on-site consultants and has attended numerous Rex Johnson s University of Lending and specialty schools. Before starting the Portfolio Analysis program Lorrie designed the highly successful training program in place at Lending Solutions Inc. (LSI). Spending four years as an onsite consultant for LSI she personally trained many of their loan underwriters. During that time she not only educated credit unions on lending but also trained their staff to make superior lending decisions. Lorrie graduated from the University of Kansas with a degree in Business Communications. C M Y CM MY CY CMY K 45 C R E D I T U N I O N B U S I N E S S M A R C H 2 0 1 6 C U B U S I N E S S . C O M Introducing The Team Builder from CU Business Magazine Helping to strengthen credit unions and their communities. VIEW FROM THE CROW S NEST COMPLIANCE UPDATE LENDING SOLUTIONS MARKETING MATTERS TECHNICALLY SPEAKING BRANCH BUSINESS CFO CURRENCY CEO VELOCITY MEMBER BUSINESS LENDING BUILD YOUR TEAM Tim O Hara Publisher CU Business Dear Tim You know how much I enjoy reading your magazine which is always filled with helpful and timely articles Sign up at www.creditunionbusiness.com. Join hundreds of CUs across the country by sharpening the skill sets of your department heads by signing up to 10 team members to receive CU Business monthly eMagazine weekly eNewsletters and over 5 years of back issues on our website. We email each Team Member PDF versions of pertinent articles before they are published according to title CEO gets CEO Velocity and View from the Crow s Nest CFO receives CFO Currency Lending department gets Lending Solutions Marketing Executives receive Marketing Matters Compliance department gets Compliance Update Trainers receive CU Training Branch Supervisors get Branch BUSINESS. Cost is only 500 per year 20% of which is sent to Children s Miracle Network to be filtered to the CMN children s hospital nearest the CU s community. A Website Wall of Fame will credit each CU with the CMN donation citing CU name city asset base and CEO. With the new Team Builder program I ll be able to retain hard copies of your magazine and ensure that my colleagues receive helpful articles on a positionspecific basis I also think supporting the Children s Miracle Network is a wonderful idea Thanks again and keep up the great work Best Walter Walter Merkle Executive Vice President Northwest Georgia Credit Union Signing up is simple Send a check for 500 ( 100 of which goes to CMN) along with a list of names titles and email addresses of up to 10 team members. Or pay just 46.60 per month on any major credit card www. creditunionbusiness.com register. PO Box 2223 Palm Beach Fl. 33480 Or call 561-282-6015 1